Microkhan by Brendan I. Koerner

Made in America

March 18th, 2011 · 9 Comments

I somehow went almost an entire month without pimping my latest Wired feature, which appears in the March issue (alongside Joel Johnson‘s excellent cover story on the Foxconn suicides). The piece is a deeply reported essay that tackles a tricky business proposition: For companies that make products out of atoms, does manufacturing in China and other low-cost countries still make sense?

The answer depends on where your firm exists in the economic food chain. As I make clear in the story, I have no expectation that that iPad 3 will be made in the U.S.A.; Apple and other titans of industry have the muscle to make Chinese outsourcing work in their favor. But the equation is a lot muddier for smaller companies—”the innovative guts of America’s technology industry,” as I term them in the piece. Though American manufacturers still can’t compete on price alone, the math is evening out to the point that smart companies are carefully weighing the pros and cons of staying home. And the biggest pro, of course, is the ability to control quality:

“If you’re a huge company like Apple, you can get the whole factory to work for you,” says Paul King, founder of Hercules Networks, a New York company that makes charging kiosks for mobile devices. “You can put your own process in place, you can have your own quality control. But without that kind of power, you’re just another customer, and they don’t really care.” King cycled through three Chinese factories from 2008 to 2010 before giving up on offshoring due to persistent manufacturing errors—LCDs that winked out after six months, lights that broke when tapped even gently. The quality woes have disappeared now that Hercules is making its kiosks in the US, King says, and the company is thriving.

To deal with their production backlogs, many Chinese factories have started subcontracting work to facilities located in the center and western areas of the country, where labor costs are cheaper than on the industrialized coasts. But this usually makes the problems even worse. “They’ll subcontract your work without providing the subcontractor with the same training that you provided to them,” says George T. Haley, a professor of industrial and international marketing at the University of New Haven who specializes in Chinese business. “Then all of a sudden, your quality assurance goes all to hell.”

On a personal note, this piece grew out of some of the Grand Empress’s experiences manufacturing lingerie abroad. I’ve seen firsthand how production delays and quality flaws can set back a young business, often at the worst possible time. As it turns out, Wired editor-in-chief Chris Anderson was on the same wavelength; his side company, 3D Robotics, now manufactures in the U.S., and couldn’t be happier with its decision. We both felt there was a story here, and plenty of lessons to be learned for American start-ups.

If you have even the vaguest interest in the business realm, I hope you’ll check out the piece and offer some feedback in comments. Unlike the typical Microkhan fare, there is no mention of Papua New Guinea, livestock management, or pyramid schemes. But that’s not necessarily a bad thing.

(Image of Diego Rivera’s River Rouge Mural via dfb)


Tags: ····

9 Comments so far ↓

  • scottstev

    Would you agree that this is a classic example of Ricardo’s Comparative Advantage ? Even though theoretically China will soon have the capacity to manufacture everything sold, bought, or processed , there will always be conditions where local manufacturing makes financial sense.

    Even though it seems we’re losing our economic strength relative to other countries, there is a great deal of advantages to doing business here.

  • Brendan I. Koerner

    @scottstev: I think a big question now is how China will respond to the growing discontent among small-to-medium-sized Western clients. If they get better at QA and enforcing IP protection (among several other issues), the pendulum could swing back the other way. As I state in the piece, it’s best to think of outsourcing as a technology that still needs to mature.

    One big part of the equation that will be tough to alter, though, is shipping costs. Tough to foresee oil price going anywhere but up, and those are the main determinant of how much it costs to send products to these shores.

  • Sean Dougherty

    Brendan, very interesting observations. I just started working with a technology consultant in New York, Brian Fino of Fino Consulting, who has observed that many technology companies who outsourced projects to low cost markets are bringing that work home now. Indians apparently are using dated technology with less-well-trained engineers on average. At this point, IT integration and automation has gotten so much better, the work can be done more efficiently here, despite the labor cost differences.

  • Brendan I. Koerner

    @Sean Dougherty: You actually raise a dilemma we faced when conceiving the piece–whether or not to cover developments in the outsourcing of “bits” work (as opposed to the “atoms” work of making tangible goods). We ultimately decided to limit ourselves to traditional notion of manufacturing, since covering code would create too many apples-to-oranges issues. But since the piece came out, I’ve heard from a lot of IT folks who make the exact point that you did–that the equation is tilting back in favor of domestic IT production, too.

    I’d wager that a lot of the same lessons apply, though–it’s small-to-mid-sized companies getting scrunched, since they don’t get the contractors’ best resources at their disposal.

  • Jordan

    Another question would be whether, when China has brought itself up to the standards that smaller American companies are looking, it will still retain a sufficiently large price advantage. We’re already seeing wages rise in a lot of coastal areas due to labor shortages, hence when the really basic types of manufacturing are moving to the interior or other countries in SE Asia and the like. Since higher quality probably means more investment in labor costs, the price advantage will probably keep shrinking.

  • Brendan I. Koerner

    @Jordan: Thanks for the sharp comment. I actually discuss the move toward China’s interior in the piece. The problem for American companies is that a lot of those new factories are subcontractors, hired by the coastal factories to handle orders. That has created more QA problems, plus heightened fears about IP theft.

    Vietnam is one nation to keep a close eye on. They have a huge new deal with Intel that could really help build their rep among American tech companies.

  • Russ Mitchell

    Please remember to pimp. I don’t subscribe to Wired anymore, but want to keep up with the BK contributions.

  • Brendan I. Koerner

    @Russ Mitchell: Keep watching this space–I have a cool robots-related piece in the April issue. Will be pimping here, for sure.

  • dfb

    Good piece. I’ve long though the future of Detroit and the rest of the midwestern rust belt depends on their ability to attract businesses intent on quality and local production. Your article lends credence to those ideas.

    btw: Thanks for the photo credit. It is much appreciated.